Assessment of the Real Impact of the Federal Reserve's Consecutive Interest Rate Cut Policies on Liquidity: An Analysis Based on Bitcoin as a Liquidity Proxy

Based on in-depth analysis of 2023-2025 market data, the actual impact of the Federal Reserve’s three consecutive interest rate cut policies on liquidity is far lower than market expectations. Analysis using Bitcoin prices as a liquidity proxy variable shows that the driving effect of monetary policy on liquidity is weakening in the current environment, while the dominant position of fiscal policy is increasingly prominent.

According to market data analysis of the three Federal Reserve interest rate cut timings in 2024, a notable phenomenon is that the rate cut policies did not bring the expected liquidity improvement:

From the chart analysis, although the Federal Reserve implemented three interest rate cuts in March, July, and September 2024, Bitcoin as a liquidity proxy variable did not show corresponding upward momentum. On the contrary, Bitcoin trading volume showed a downward trend during the rate cut periods:

• Average trading volume during March 2024 rate cut: 37.9 billion USD
• Average trading volume during July 2024 rate cut: 27.8 billion USD (down 26.7%)
• Average trading volume during September 2024 rate cut: 35.3 billion USD (rebounded from July but still lower than March level)

From historical data, the trend of Bitcoin prices and the federal funds rate has diverged significantly since 2023. Traditional theory suggests that rate cuts should boost risk asset valuations and increase market liquidity. However, actual conditions show that this transmission mechanism has failed in the current environment.

On December 1, 2025, the Federal Reserve officially ended Quantitative Tightening (QT), freezing its balance sheet at 6.57 trillion USD. Previously, it had withdrawn 2.39 trillion USD of liquidity from the system [1]. This event has far-reaching significance:

• Shift in Liquidity Supply Structure
  : The Standing Repo Facility has transformed from an emergency tool to a permanent daily liquidity provider
• Reconstruction of Market Expectations
  : Analysts compare the current situation with August 2019 when the Federal Reserve ended QT, during which altcoins bottomed out and rebounded [1]

The current liquidity cycle is more dominated by U.S. fiscal policy than monetary policy, based on the following observations:

1. Treasury Bond Issuance Pace
   : Large-scale Treasury bond issuance by the Treasury directly affects market liquidity supply
2. Fiscal Expenditure Impulse
   : Government spending injects liquidity into the real economy through the banking system
3. Tax Cycle Impact
   : Seasonal tax changes have periodic shocks on liquidity

The effectiveness of Bitcoin as a liquidity proxy variable is reflected in multiple dimensions:

• Global 24/7 Trading
  : Not restricted by traditional market opening hours, reflecting liquidity changes in real time
• No Counterparty Risk
  : Decentralized nature makes it a pure liquidity barometer
• Regulatory Sensitivity
  : Highly sensitive to macro liquidity changes

From the standardized comparison chart of Bitcoin and the S&P 500, the two show obvious divergence. This divergence reflects the difference in liquidity allocation across different asset classes and also verifies the value of Bitcoin as an independent liquidity proxy indicator.

Based on the latest data analysis, key signals transmitted by the current market include:

1. Weakening of Liquidity Transmission Mechanism
   : The efficiency of traditional monetary policy transmission channels has decreased in the current environment
2. Structural Liquidity Shortage
   : Although QT has officially ended in name, structural liquidity constraints still exist
3. Divergence in Risk Preferences
   : The response of different investor groups to liquidity changes has become more divergent

• Focus on fiscal policy signals, especially Treasury bond issuance plans
• Monitor changes in the scale of Standing Repo Facility usage
• Use volatility differences between Bitcoin and traditional assets for arbitrage

• Pay attention to further rate cut expectations at the December 2025 FOMC meeting
• Track the policy tendencies of the Trump administration regarding Federal Reserve personnel appointments [2]
• Deploy digital asset sectors that benefit from liquidity improvement

• Focus on the impact of fiscal sustainability on long-term liquidity
• Monitor the structural impact of changes in the U.S. dollar system on digital asset liquidity
• Consider the reconstruction of global liquidity allocation by geopolitical factors

1. Policy Coordination Risk
   : Inconsistent monetary and fiscal policies may lead to violent fluctuations in liquidity
2. Changes in Regulatory Environment
   : Adjustments to digital asset regulatory policies may affect the effectiveness of Bitcoin as a liquidity proxy
3. Geopolitical Shocks
   : Global geopolitical events may break the existing pattern of liquidity allocation

Based on current trend judgments, the following developments may occur in the future liquidity market:

• Diminishing Marginal Effect of Monetary Policy
  : The impact of traditional monetary policy tools on liquidity will continue to weaken
• Strengthening Dominance of Fiscal Policy
  : Fiscal policy will become the main tool for liquidity management
• Rising Status of Digital Asset Liquidity Indicators
  : The role of digital assets such as Bitcoin in liquidity monitoring will become more important

Through in-depth analysis of Bitcoin as a liquidity proxy variable, we draw the following core conclusions:

1. The real impact of the Federal Reserve’s consecutive rate cuts on liquidity is limited
   , and the efficiency of the traditional monetary policy transmission mechanism has decreased in the current environment
2. Fiscal policy has become the main driver of the liquidity cycle
   , with monetary policy in an auxiliary position
3. Bitcoin has unique value as a liquidity proxy indicator
   , which can provide information on liquidity changes that traditional indicators cannot capture
4. Investment strategies need to be reconstructed from a liquidity perspective
   , focusing on fiscal policy trends and structural liquidity changes

This analysis framework provides a new perspective for understanding liquidity changes in the current complex macro environment and also provides important references for investors to formulate reasonable asset allocation strategies during the policy transition period.

[0] Jinling API Data

[1] Yahoo Finance - “Tomorrow the Fed Ends QT — Crypto Thinks the Melt-Up Starts Now” (https://finance.yahoo.com/news/tomorrow-fed-ends-qt-crypto-195200403.html)

[2] Forbes - “Bitcoin Price Outlook: All Eyes On Policymakers Following Fed Rate Cut” (https://www.forbes.com/sites/digital-assets/2025/12/12/bitcoin-price-outlook-all-eyes-on-policymakers-following-fed-rate-cut/)

[3] Bloomberg - “Bitcoin’s BOJ Stumble Shows Dovish Fed Isn’t Enough for Crypto” (https://www.bloomberg.com/news/articles/2025-12-01/bitcoin-s-boj-stumble-shows-dovish-fed-isn-t-enough-for-crypto)